What Is a Personal Loan Overdraft Facility and Should You Go For It?

Are you considering taking out a personal loan but want more flexibility in managing your finances? A personal loan overdraft facility might be the perfect solution for you.

This financial product combines the benefits of a traditional personal loan with the convenience of an overdraft, giving you greater control over your borrowing needs. Whether you’re planning a major purchase, consolidating debt, or simply looking for a safety net for unexpected expenses, a personal loan overdraft facility can provide the financial freedom and the peace of mind you need.

What Is a Personal Loan Overdraft Facility?

A personal loan overdraft facility is a financial product that combines the features of a personal loan and an overdraft account. Unlike a traditional personal loan, where you receive a lump sum amount that you repay in fixed installments, an overdraft facility allows you to withdraw funds as needed, up to a pre-approved limit. You only pay interest on the amount you use, not the entire approved limit.

It’s particularly useful for managing cash flow or covering unexpected expenses without the commitment of a fixed monthly payment. Additionally, it often offers lower interest rates compared to credit cards, making it a cost-effective borrowing option.

Managing Cash Flow Gaps with an Overdraft Facility

Scenario: A small business, “XYZ Crafts,” specializes in handmade furniture. The business has a seasonal sales pattern, with higher sales during the holiday season and lower sales in the months following.

Situation:

• Monthly Revenue: During the holiday season, XYZ Crafts typically earns Rs. 5,00,000. However, in January, sales dropped to about Rs. 1,50,000.
• Monthly Expenses: The business has fixed monthly expenses of Rs. 3,00,000, which include rent, salaries, and supplies.
• Cash Reserves: At the beginning of January, XYZ Crafts had Rs. 2,00,000 in its bank account.

Challenge:

In January, XYZ Crafts faced a cash flow gap. With monthly expenses of Rs. 3,00,000 and only Rs. 1,50,000 in revenue for the month, the business will not have enough cash to cover its expenses. If the business cannot pay its suppliers and employees on time, it risks damaging relationships and facing operational disruptions.

Solution:

XYZ Crafts has an overdraft facility of Rs. 2,00,000 linked to its business account. Here’s how they can use it:

1. Utilizing the Overdraft:
   To cover the cash flow gap, the business withdraws Rs. 1,50,000 from the overdraft facility. This allows them to meet their total expenses for January (Rs. 3,00,000).

2. Repayment:
   As sales pick up again in February, XYZ Crafts receives payments from customers totaling Rs. 4,00,000. With this influx of cash, the business can repay the Rs. 1,50,000 utilized from the overdraft facility, along with any accrued interest.

3. Benefits:
   • Operational Continuity: By using the overdraft, XYZ Crafts can pay its employees and suppliers on time, maintaining good relationships and ensuring smooth operations.
   • Flexibility: The business can withdraw and repay funds as needed, without being tied to a fixed repayment schedule, which is crucial during fluctuating sales periods.

How Does a Personal Loan Overdraft Facility Work?

1. Approval and Limit Setting:
   • Application: You apply for overdraft loan facility with a lender, which could be a bank or a financial institution.
   • Assessment: The lender assesses your creditworthiness and financial history.
   • Limit Approval: Based on the assessment, the lender approves a specific overdraft limit. This limit is the maximum amount you can borrow.

2. Accessing Funds:
   • Withdrawals: You can withdraw funds multiple times up to the approved limit, either through online banking, mobile apps or by visiting a branch.
   • No Immediate Interest: You are not charged interest until you use the overdraft facility.
3. Usage and Interest:
   • Interest Calculation: Interest is calculated only on the amount you withdraw, not the entire approved limit.
   • Daily Calculation: Interest is usually calculated daily on the outstanding balance and is charged at the end of the month or as per the lender’s terms.

4. Repayment:
   • Flexible Repayment: You can repay the borrowed amount at your convenience within the agreed tenure, which can be up to a maximum of 2 years (depending upon lender’s policy)
   • Partial Payments: You can make partial payments towards the overdraft, reducing the interest burden as the outstanding balance decreases.
   • No Fixed EMIs: Unlike traditional loans, there are no fixed monthly payments; you repay as per your cash flow.

5. Renewal:
   • Renewal: At the end of the tenure, you may have the option to renew the overdraft facility based on your relationship with the lender and your repayment history.

6. No Extra Collateral:
   • Pre-approved Facility: If the overdraft is pre-approved, no additional collateral is required to avail of the funds.

7. Additional Benefits:
   • No Pre-Closure Charges: You can repay the borrowed amount early without incurring any pre-closure charges.
   • Eligibility: Both salaried and self-employed individuals can avail of this facility, making it versatile and accessible.

6 Top Differences Between Overdraft vs Personal Loan

When to Use an Overdraft Facility?

• Managing Cash Flow: Ideal for covering temporary cash flow shortages, ensuring business operations or personal finances run smoothly.
• Handling Emergencies: Useful during unexpected financial emergencies, providing quick access to funds without the need for a lengthy loan process.
• Seasonal Expenses: Perfect for businesses with seasonal expenses, allowing for easy management of peak season costs without financial strain.
• Unplanned Large Purchases: Suitable for unplanned, large purchases where immediate funds are needed but repaying over a short term is manageable.
• Project Financing: Helpful for financing short-term projects or bridging gaps between project costs and payments received.
• Bill Payments: Useful for ensuring timely payment of bills to avoid penalties or service interruptions when funds are temporarily low.
• Investment Opportunities: Allows quick access to funds for potential investment opportunities that require immediate capital.
• Business Needs: Beneficial for businesses needing to manage working capital or unexpected expenses without disrupting cash flow.

Types of Personal Loan Overdraft Facility

Fees and Charges of Personal Overdraft Loan Facility

Eligibility Criteria for Personal Overdraft Loan Facility

Documents Required for Personal Loan Overdraft Facility

How to Apply for Overdraft Personal Loan Facility?

Verify Eligibility:

• Ensure you are an Indian resident aged between 21 and 65 years.
• Confirm you have a good credit score (typically above 750).
• Both salaried and self-employed individuals are eligible.

Gather Required Documents:

• Identity proof (Aadhaar Card, PAN Card, Passport, etc.)
• Address proof (Utility bill, Passport, etc.)
• Income proof (Salary slips for the last 3 months or ITR for self-employed)
• Bank statements for the last 6 months
• Passport-size photographs

Select a Lender:

• Research various banks or financial institutions that offer personal overdraft loan.
• Compare interest rates, fees, and terms to choose the best option for you.

Complete the Application Form:

• Visit the lender’s website or branch to fill out the application form.
• Accurately provide all required personal and financial information.

Submit Your Documents:

• Submit the required documents along with your completed application form.
• Follow the lender’s instructions for submission, whether online or in person.

Wait for Approval:

• The lender will review your application and documents.
• They will conduct a credit check and evaluate your financial profile, which usually takes a few days.

Receive the Sanction Letter:

• If approved, you will get a sanction letter detailing your overdraft limit, interest rates, and terms.
• Carefully review the letter before moving forward.

Activate Your Overdraft Facility:

• Accept the terms and conditions provided.
• The lender will activate your overdraft facility, allowing you to withdraw funds up to the approved limit.

Manage Your Overdraft:

• Use the overdraft as needed, noting that interest is only charged on the amount withdrawn.
• Repay the principal at your convenience without incurring prepayment charges.

A personal overdraft loan facility offers a flexible and convenient way to manage your finances. With the ability to withdraw funds as needed, pay interest only on the amount used, and repay at your convenience without fixed EMIs, it provides a versatile solution for both salaried and self-employed individuals. Quick approval, no prepayment penalties, and the option to renew make it an attractive and cost-effective borrowing option.